Insight: The Challenges of Niche Production

It is typical in mature consumer markets for competitors to seek to differentiate themselves by creating increasingly narrow "niche" products that appeal to smaller and smaller sub-segments of the buying population.

Columns Post: 11/1/2005

John Cleveland

Vice President, IRN, Inc.

It is typical in mature consumer markets for competitors to seek to differentiate themselves by creating increasingly narrow "niche" products that appeal to smaller and smaller sub-segments of the buying population. This trend has accelerated in the mature North American automotive market, and is expected to continue into the foreseeable future. These new niche vehicles represent both a challenge and an opportunity for suppliers who want to take advantage of the market they represent.

The Fragmentation of the Market Place

From 2000 through 2008, the average units produced per North American nameplate (total production divided by the number of nameplates) will drop by 26%, from 122,000 to 90,000.1 During this same time frame, the number of nameplates running at less than 50,000 units per year will increase by 50%, from 50 to 75. These low-volume nameplates will account for 40% of the total nameplates produced in this market. Many of these sub-50,000 unit vehicles will be highly targeted vehicles expected to be produced in volumes of 5,000 to 20,000 units per year.

OEMs produce these vehicles for a variety of reasons. Some are what are referred to as "halo" vehicles-high profile, radically designed cars whose main purpose is to have a "novelty" or "cool" factor that draws customers into the showroom, where they then purchase more traditional vehicles. Marketers have studied the effects of these halo vehicles and determined that successful ones can increase showroom traffic by as much as 2%. (On this basis, it could be argued that the P&Ls for these vehicles should really show up in the marketing department budgets.) Or low-volume vehicles are designed to appeal to particular lifestyles or affinity groups. In still other cases (e.g. the PT Cruiser), cars designed to be low-volume niche vehicles hit a nerve with a large mainstream segment of the market and became high-volume nameplates.

The explosion of niche nameplates indicates that North American producers, long known for the overall lack of imagination in their styling, have finally woken up to the fact that design really does matter and shouldn't be a tacked-on afterthought to performance, quality and pricing. Consumers will buy "cool cars"-and will often buy a cool car when they weren't even planning on buying any car at all. And the taste for styling is growing.

The Low-Volume Profitability Problem

As nameplates proliferate and lower-volume vehicles claim an increasing share of the market place, OEMs will be faced with the challenge of figuring out how to profitably produce these vehicles. If the main purpose of a niche vehicle is to be a marketing device for your traditional models, you don't worry about making money on each unit. In fact, assuming you are losing money on each sale, you want to sell as few as possible and still get the "halo" effect. (Maybe this is why Pontiac has plans to build only a limited number of Solstice vehicles, the evident demand notwithstanding.) As the popularity of niche vehicles continues to grow, these economics don't make sense and the OEMs will have to get serious about redesigning their production processes and supply chain to drive down the break even point of low volume vehicle models. In turn, suppliers will have to figure out how they can make money supplying to these new niche vehicles.

What Suppliers Need To Pay Attention To

The Center for Automotive Research (CAR) in Ann Arbor has initiated a research project to address low-volume vehicle production issues, focused on the car body, where profitable production is especially proble-matic.2 The Low Volume Vehicle Production Consortium includes OEMs, Tier 1 assemblers, die and mold builders, equipment suppliers, and fabricators. Some of the issues that suppliers need to consider as they develop their strategies for this market include:

NEW "TIER 1.5" CUSTOMERS. It is likely that more and more of these low-volume vehicles will be designed and/or assembled by a new breed of "Tier 1.5" suppliers like Magna Steyr and ASC (who cleverly changed its name from the American Sunroof Company to the American Specialty Car Corporation without having to change its acronym.) Magna already assembles vehicles for BMW in Europe, but has not yet gotten into the assembly market here in the U.S. (although the addition of Mark Hogan to Magna's management has provoked considerable speculation on this subject). ASC is currently the only North American company that has placed itself squarely in this niche, describing itself as a "specialist body engineering and assembly company for low volume production vehicles." 3 The company emphasizes its focus on developing "cool cars" and its website announces its intention to attract "car nuts" to the company. The company culture is very much a "design" culture. As this niche continues to grow, suppliers will need to develop relationships with these new vehicle development and assembly players-and understand and connect to their "culture of design."

LOWER COST TOOLING. Tooling costs are one of the largest barriers to profitability in the low-volume niche. The "perfection" goal in tooling is to have the same tooling cost per part, regardless of volume. For most volumes and most components, low-volume production is far from this goal. As a result, tooling costs (both for fabrication and assembly) add significantly to the cost of the niche vehicle. In some cases, prototype tooling that has been able to be used for total part production (over the entire life of the tool, not on a per-year basis) of a few thousand parts can be "fortified" to reliably produce parts in the 15,000 to 20,000 range. And at the top end, high-volume tooling that is designed to run 750,000 or 1,000,000+ parts can be "leaned down" to cost effectively run for several hundred thousand parts. There is a "missing middle" where effective tooling solutions have not yet been found.

Suppliers who are interested in getting positioned in this market will either need to have internal tooling capabilities or partner with tooling firms that have capabilities in some of the emerging short-run tooling technologies, such as aluminum molds; epoxy and Kirksite dies; laminated dies and molds; direct metal deposition; and sprayed metal tooling. They will also have to be adept at calculating the "cost curve" (i.e., cost per volume based on forming technique) for their components. Standard costing systems will not be much use in this new environment.

DIFFERENT FORMING TECHNIQUES. Along with the new tooling technologies come a variety of new forming processes that are likely to be more cost effective than traditional stamping and injection molding at lower volumes, including sheet hydroforming (which is more widespread in Asia than here in North America, but is beginning to gain favor for short run applications); SMC; liquid impact forming; and roll forming.

FLEXIBLE PROCESSES. The run rates of niche vehicles don't allow for fixed assembly tooling costs for each model. Instead, they favor more manual methods, as well as flexible automation that can be easily reprogrammed, or automation components that can be easily reused (the automation version of "communization and reuse" of components).

As with any emerging market, there are significant risks for suppliers in the niche vehicle segment. With low volumes, there is a lot less production across which to amortize development costs-so mistakes can be very costly and quickly eat up margins. And yet, because of the experimental nature of the work, mistakes will be inevitable. This means it is very important to have highly collaborative and partnership-based relationships with customers (whether the Tier 1's or the OEMs) in this segment. The upside of markets like this, of course, is that if the market does take off, the "early adopters" have an enormous competitive advantage in know-how and relationships compared to the late-comers. Our sense is that this is a market that will increase rather than decrease, and is a good investment for innovation-oriented suppliers.

While it is the most reliable way of differentiating among real production differences for vehicles, a calculation of market fragmentation based on nameplates significantly understates model proliferation due to trim and drivetrain variations. For instance, the Ford F-Series is a single nameplate, but encompasses a large number of model variations. While the total number of nameplates produced in North America in 2005 is a little over 160, the number of model variations-depending on how you calculate it-could be more than 1,500.

Companies interested in learning more about the consortium can contact CAR through their website at www.cargroup.org.

In Europe, styling and engineering companies like Pininfarina have staked out a similar niche.